Term Structure of Interest Rates

Much is made of the yield curve and the interpretation of its various shapes. The claim is that the shape of the yield curve represents market expectation of future rates and inflation over time. The slider bar creates a dynamic look back over many years. Particular shapes that are referred to in the popular press can be viewed using the popup menu.

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The naming convention is less than precise. "Downward sloping" is sometimes called "inverted"; "humped" and "convexity" are very similar. What matters is whether the market is correctly predicting the future. A useful thought experiment is to set the slider at a time when extreme predictions were being made for years later—in September 1982 the 15-year bond was 10%; 15 years later, in August 1997, the yield curve was nearly flat at just over 5% for most maturities. One can readily conclude from this that predicting interest rates is, at best, challenging.

The data source is the U.S. Federal Reserve daily treasury yield curve rates. Note that there are gaps in the plot during periods when data is not available, either because those maturities were not issued or not tracked. For example, the Fed lost interest in the 30-year bond rates for four years between 2002 and 2005 inclusive.